Australia and Israel sign income tax treaty

By Theo Sakell - May 8, 2019

Australia and Israel have signed their very first tax treaty on 28 March 2019. The income tax treaty will come into effect when the relevant approvals are obtained in each jurisdiction, and may impact businesses with parent companies, subsidiaries or investments in Israel, or other cross border transactions with Israel.

Given the current volume of trade and investment between Australia and Israel, the treaty is an important addition to Australia’s existing tax treaty network. It will help accelerate the increasing R&D development and commercialisation, M&A and IPO activity between the two countries.

Treaty features

Features of the treaty include reduced rates of dividend, interest and royalty withholding taxes and rules to prevent double taxation, with the treaty providing greater tax certainty to taxpayers in both jurisdictions. The treaty contains all essential features of the MLI instrument[1] and represents Australia’s first new treaty since ratifying the MLI.

The treaty addresses a range of matters including those outlined below.

Reduced dividend withholding tax rates

Rate

Dividend recipient

0%

Dividends derived by governments, tax exempt pension funds and Australian complying superannuation funds in respect of non-portfolio holdings (i.e. less than 10% holdings)

5%

Corporate shareholders who hold at least a 10% shareholding for at least 365 days (including the date of dividend payment)

15%

In all other cases

Reduced interest withholding tax rates

Rate

Interest recipient

0%

Interest derived by government bodies and banks

5%

Interest derived by pension funds, unrelated financial institutions and Australian complying superannuation funds

10%

All other cases

A 5% withholding tax will apply in respect of royalties, as defined under the treaty, paid by an Australian resident to an Israeli resident (or vice versa).

Tie breaker rules

The treaty provides tie breaker rules to determine the tax residence status of an individual who is tax resident in both Australia and Israel. However, in the case of a company that is dual tax resident (e.g. tax resident in Israel because of incorporation and tax resident in Australia because of central management and control or vice versa), the treaty requires that the relevant tax authorities of the two countries jointly decide the tax residence status of the company. 

Who does the treaty apply to?

The treaty will apply to Australian tax residents and Israeli tax residents undertaking certain activities, investments or transactions with the other jurisdiction. 

When does the treaty apply from?

Once the relevant domestic procedures have been undertaken in both jurisdictions and the relevant instruments of ratification have been exchanged, the treaty will have effect in Australia from the following 1 January in relation to withholding taxes, the following 1 April in relation to fringe benefits tax and the income year beginning on or after the following 1 July in relation to income tax.  For example, if the relevant procedures are undertaken in the 2020 calendar year, the treaty will have effect in Australia from 2021.

Whilst the ratification procedures are not expected to be completed until 2020, Pitcher Partners will monitor the position and provide an update should the relevant procedures be completed sooner.

Case studies: How the treaty will operate

Currently, a dividend paid by an Israeli company to an Australian company with a 10% or more shareholding is subject to 30% dividend withholding tax in Israel. Once the treaty is in effect, a maximum rate of 5% dividend withholding tax will apply in Israel, subject to the requisite 365 day holding period being met.

Currently, interest paid from an Israeli resident to an Australian resident may be subject to up to 25% withholding tax in Israel. Once the treaty is in force, this rate will reduce to 10% or even lower depending on the attributes of the recipient.

What are the next steps?

If you would like further detail in relation to how the treaty may affect you and your business, please contact your Pitcher Partner experts.


[1]       Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.

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